Washington Hotline – October 30, 2012

CEOs Support Higher Taxes and Debt Solution

The nonpartisan Committee for a Responsible Federal Budget in cooperation with former Sen. Alan Simpson and former White House Chief of Staff Erskine Bowles has created a “Campaign to Fix the Debt.”

Bowles and Simpson were co-chairs of the National Commission on Fiscal Responsibility and Reform. They proposed a bipartisan budget solution at the request of President Barack Obama.

On October 25, over 100 CEOs gathered at the New York Stock Exchange to support a comprehensive budget solution similar to that proposed by the Bowles-Simpson Commission. One of the commission members was Honeywell Chairman and CEO David Cote. He stated, “The U.S. has an opportunity to not only fix our debt issue and have an economic recovery, but we can also be a model for the world and how to deal with debt. What it really comes down to is if we still have the political will to be a great country.”

Cote continued to emphasize that it is important to develop a comprehensive solution. This solution will include “higher revenue, reduced entitlement spending, reduced discretionary spending, and investment in infrastructure and math and science.”

Congressional leaders from both parties responded to this public proclamation by leaders of many of America’s largest corporations. The Senate Democratic leadership indicated that it believes part of the solution involves tax increases on individuals with higher incomes. House Republican leaders continue to oppose these tax increases.

Sen. Bernie Sanders (I-VT) observed that it is important for corporate leaders to pay their “fair share” of taxes. He commented, “Our Wall Street friends might also want to show some courage of their own by suggesting that the wealthiest people in this country, like them, start paying their fair share of taxes.” Sanders noted that many large corporations use various tax provisions to reduce their taxes. In his view, this tax reduction has been a factor in the major deficit problems.

Maya MacGuineas, Chair of the Committee for a Responsible Federal Budget, supported this bipartisan effort by the 100 CEOs. She stated, “The collective voice of these business leaders has helped shine a light on the fact that the debt is already affecting Americans where they work and live. We have listened to the CEO Council and heard the consequences of inaction – businesses aren’t investing in an uncertain economy and are slowing job growth to protect their employees. With the CEOs’ backing and the support of the over 280,000 person Grassroots Network, we believe we can successfully push for a comprehensive debt reduction deal.”

Editor’s Note: It is unusual for a bipartisan group of business leaders to be so public in support of both a budget solution and higher taxes. This willingness to place both spending and tax increases on the table is significant.

Charitable Giving Coalition Supports Deductions

On October 25 the Charitable Giving Coalition published a letter to both President Barack Obama and Governor Mitt Romney. The coalition emphasized the importance of maintaining charitable gift deductions in any future tax reform.

The coalition letter stated, “Any proposed cap would have long-lasting negative consequences on the charitable organizations upon which millions of Americans rely for vital programs and services.”

Both the President and the Presidential Nominee have proposed caps on itemized deductions that would impact charitable giving. President Obama proposed limiting the deduction benefit to 28% for individuals with higher incomes. This would reduce the tax savings for charitable gifts by major donors.

Governor Romney has discussed the possibility of a cap on itemized deductions at $17,000, $25,000 or $50,000. Charitable gifts above any cap would not be deductible.

The letter is published in the midst of a huge growth in the need for nonprofit services. The nonprofit Finance Fund reports that 85% of nonprofits had a higher level of requests for their services in 2011. According to Giving USA, donors gave $300 billion in 2011 to support charitable organizations. The future gift level may be significantly limited if there are caps on deductions. The Charitable Giving Coalition fears a “devastating impact on charities and nonprofits.”

The coalition notes that the charitable deduction is actually saving substantial governmental funds. One dollar in tax relief produces approximately $3 in public benefits. It is the most effective deduction because the services provided by nonprofits reduce potential expenditures by governmental organizations.

In 2011, nonprofits provided 13.5 million jobs and 9% of total wages. Many nonprofits are providing education, relief and medical research services. These nonprofits provide comprehensive support to those in need throughout America.

On December 4 & 5, staff of many nonprofits will gather in Washington, D.C. for “Protect Giving-D.C. Days.” Leaders of nonprofits throughout the nation will meet with members of Congress and support continuation of charitable deductions.

Bargain Sale Conservation Easement Approved

In Charles R. Irby et ux. et al. v. Commissioner; 139 T.C. No. 14; Nos. 7559-10, 7561-10, 7562-10, (24 Oct 2012), the Tax Court approved a conservation easement deduction as part of a bargain sale.

Irby Ranches, LLC (Irby) operates two cow-calf ranches east of Gunnison, Colorado. The family has lived and ranched in the area for four generations. After discussions with Colorado Open Lands (COL), Irby conveyed conservation easements to the organization in 2003 and 2004.

Funding for the combined bargain sale-conservation easement transaction was provided by multiple federal and state agencies. Irby was paid $268,224.75 in 2003 and $537,468.75 in 2004.

The easements granted to COL restrict the land to agricultural uses. There may be no commercial timber production, mining, oil and gas extraction, feed lots or subdivision development. COL is authorized to enforce the perpetual easement.

A qualified appraiser determined that the value of the property was reduced by 63% for the first easement and 60% for the second easement. The payments were less than the value determined by appraiser Arnold Butler. Based on comparable sales and the Form 8283 prepared by Butler, Irby claimed a deduction of $89,408.75 for 2003 and $165,576.21 for 2004.

The IRS contended that the easement failed to protect the conservation interest in perpetuity because a condemnation of the land would result in a reimbursement from COL to the federal and state agencies. The court noted that this was the first consideration of this issue. Because the federal and state conservation agencies had contributed funds, a condemnation of the property would trigger that reimbursement.

The court considered the purpose of Reg. 1.170A-14(g)(6)(ii). It requires the conservation agency to receive “a portion of the proceeds at least equal to that proportion value of their perpetual conservation restriction.” While part of the proceeds allocated to COL would be returned to the state and federal agencies, this was deemed acceptable because the purpose of the statute was to avoid private benefit or return of value to private landowners. The funds that would be transferred through the reimbursement would be used for similar conservation purposes.

The second issue raised by the IRS was compliance with the qualified appraisal requirements of Reg. 1.170A-13(c)(3)(ii)(G). The appraisal must state that it “was prepared for income tax purposes” and the Butler appraisal did not contain an explicit statement to that effect. However, the full appraisal included a sufficient description of the purpose of the conservation easement and therefore was deemed to have complied with that requirement.

Third, a gift of $250 or more requires under Sec. 170(f)(8)(A) a contemporaneous written acknowledgement by the nonprofit. In this case, there was no specific document that complied, but there were option agreements, IRS Form 8283, letters from COL to Irby, the settlement document and deeds. Taken together, the collective documents were deemed sufficient to comply with the requirement. The conservation easement was held to be valid.

Façade Easement Value Limited

In White House Hotel Limited Partnerships v. Commissioner; 139 T.C. Memo. 13; No. 12104-03 (22 Oct 2012), the Tax Court, reviewing a case on remand from the Fifth Circuit, determined that the value of a conservation easement was very close to the initial award.

In the initial hearing of White House I, 131 T.C. 115, the Tax Court accepted in large part the valuation determination of the IRS appraiser. White House had acquired an historic structure named the Maisen Blanche building. It and related structures fronted Canal Street in New Orleans. In 1997, White House and the Ritz-Carlton Hotel Co., L.L.C. (Ritz-Carlton), agreed to an acquisition of the property and construction of a luxury hotel. The Ritz-Carlton hotel opened in 2000. The total cost to White House for the properties involved was $11,000,938.

On December 29, 1997, White House deeded a façade easement on the property to the Preservation Alliance of New Orleans, Inc. The easement valuation was $7.445 million. The IRS denied the deduction and determined that the easement value should be $1.15 million and also assessed a Sec. 6662(a) gross valuation misstatement penalty.

White House appraiser Richard J. Roddewig claimed that the loss of the right to build 60 new hotel rooms above existing structures significantly impacted the value of the façade easement. He did not base his valuation primarily on comparable sales, but rather on the reconstruction cost if the building were demolished or destroyed.

IRS appraiser Richard Dunbar Argote used a comparable sales method. Based on his determination, the façade easement value was $1.15 million.

In White House Hotel LTD. P’Ship v. Commissioner, 615 F.3d 321 (5th Cir. 2012), the Fifth Circuit vacated the initial decision and remanded the case. The Tax Court was instructed to make an explicit determination on whether it is possible to construct the 60 additional rooms. In addition, the Tax Court was required to reconsider the highest and best use of the property.

The Tax Court reviewed the various appraisals. It determined that Roddewig did not support the additional 60 new room construction option. In addition, his claim that the 1908 structure would be rebuilt if destroyed was not supported. Because he had errors in basic assumptions, his model was deemed invalid.

Based on nine comparable sales reviewed by Argote, the façade easement value was $1,792,301. After review of the appraisals, the court determined that the value should be adjusted to $1,857,716.

Under Sec. 6662(a), the IRS assessed a 40% gross valuation misstatement penalty. The claimed deduction was approximately 400% of the permitted value.

Taxpayers claimed that they relied on extensive information from their attorneys, CPAs and appraisers. This reliance constituted a “good faith investigation” of the value. However, the court noted that an initial appraiser named Richard Cohen had determined the property increased in value from approximately $9 million to $96 million in less than three years. Based on the $96 million value, the reduction in value of $7.445 million was determined. The court held that appreciation of 970% in less than three years was not a reasonable assumption. Therefore, there was not a “good faith investigation” and the penalty was applicable.

Applicable Federal Rate of 1.0% for November — Rev. Rul. 2012-30; 2012-45 IRB 1 (17 Oct 2012)

The IRS has announced the Applicable Federal Rate (AFR) for November of 2012. The AFR under Section 7520 for the month of November will be 1.0%. The rates for October of 1.2% or September of 1.0% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2012, pooled income funds in existence less than three tax years must use a 1.8% deemed rate of return. Federal rates are available by clicking here.

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